The stock up 55% in the past year, in-line
with the Nikkei. However, we find the valuation reasonable and outlook decent, fuelled
by NAND flash memory and power systems. Nuclear power strikes us a giant call
option for Toshiba’s stock, given the low expectations for nuclear power in
Japan post earthquake. PE is 13x the consensus EPS for FY3/14. According to Toshiba’s IR, investors are
mainly interested in the ever-volatile currency impact, nuclear power in Japan,
NAND flash, etc. NAND flash business in April and May appears to be above plan. The firm’s Y260 OP (Y194 last year, +34% YoY)
forecast is lower than consensus Y317 OP, which makes sense given that the FOREX
cushion at current rates is about Y40bn.

Semiconductors:

Capex estimate for FY3/14 is Y170bn for semiconductors
and storage with about Y10-20bn for storage and remaining Y150-160 for chips,
with 90% of chip capex for NAND flash. In FY3/13, capex was quite low at Y94bn for
semiconductors and storage with again about Y10-20bn for storage and remaining
Y74-84 for chips. Priority for capex is miniaturization. At fab 5, Toshiba is
adding equipment (phase 1) and adding building size (phase 2). 90% of capacity
is in 19 nm width circuitry and 10% for 24 nm. Toshiba’s roadmap for 1x and 1z
is in the pipeline without hard dates. ReRAM is also planned (post-generation
NAND). Sandisk remains a production partner (JV) for NAND flash.

Bit growth estimate is 40% for FY3/14 and was
under 50% in FY3/13, which was lower than the total market due to Toshiba
cutting production in July last year. We understand that utilization is nearly
full capacity now, recovering from 70% in Oct.-Dec., 70-80% in Jan.-March,
95-100% in April-June.

Applications for NAND are projected to be as
follows: Retail (card): 30%, non-retail: 70%. Last year was about the same
ratio. Toshiba no longer estimates application by card, cellphone, etc.
anymore.

Profitability of semiconductors: In FY3/13, we believe that NAND
was over 10% OP margin. System LSI and discrete were in black slightly in
FY3/13 and should be in FY3/14. For semiconductor and storage, OP forecast is
Y130bn this year and was Y96bn last year. Storage sales fell to Y395bn (Y520bn
original forecast) as demand in the 2H worsened. OP was in black in 1H, but
profits suffered in 2H. 2.5” HDD demand from PCs are sluggish while 3.5”. Nuflare
technologies profits are included in this years forecast since it is now a
consolidated subsidiary.

Social infrastructure:

Power systems: Nuclear power sales remain
twice as large as non-nuclear (thermal power). Thermal power profitability should
taper this year since last year there was high margin “rush orders” for
domestic projects post-quake. 2015 was the old target for Y1 trillion in
nuclear power sales, now that has been pushed back to 2017. Domestic projects
have been cancelled or postponed. There are 8 current projects, 4 in China, 4
in the USA. China projects are for reactor only while USA projects are full
construction at Southern Power, Scana, etc. 1 unit in China should be finished
as early as 2014. Japan plan for nukes remains unclear for construction, but it
is possible that Toshiba gets service business for decommissioning or upgrades.
Nuclear sales are about 9-10% of total company revenues.

Digital products:

LCD TV: OP was in the red last year, somewhere
less than Y50bn OP loss. Units were 11 million last year and projected to be 11
million this year also. (Units were to grow to 16mn in FY3/13 from 14mn in
FY3/12.)

PC business: Sales fell 15% YoY in FY3/13.
Outlook this year is flat at 16 million units. PC fell into red in Q4 of last
year after decent margins in Q1-Q3. OP was Y6.4bn in FY3/13 and should be
break-even level this year.

FOREX:

OP impact is Y1.3bn for $USD and
Y1.7bn for euro for a Y3.0bn total. However, Toshiba claims that the actual
benefit from a weaker yen is about half of Y3.0bn if the yen weakens from
current assumptions. This is due to higher energy and procurement costs as the
yen weakens according to Toshiba. FOREX assumptions for this year are quite low
at Y90 for $USD and Y115 for the euro. Average last year was Y82 and FY3/12 was
Y79, and benefit from yen weakness was Y2bn last year. OP impact was perversely
larger at Y3.5bn to $USD and Y1.8bn for euro in FY3/13. Toshiba suggests that
exports of LCD TVs and the like are lower this year.